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Page added on May 21, 2014
China steps up speed of oil stockpiling as tensions mount in Asia
Beijing has ordered an “unprecedented” build up of oil reserves as West prepares for possible oil sanctions against Russia.
China is stockpiling oil for its strategic petroleum reserve at a record pace, intervening on a scale large enough to send a powerful pulse through the world crude market.
The move comes as tensions mount in the South China Sea, and the West prepares possible oil sanctions against Russia over the crisis in Eastern Ukraine. Analysts believe China is quietly building up buffers against a possible spike in oil prices or disruptions in supply.
The International Energy Agency (IEA) said in its latest monthly report that China imported 6.81m barrels a day in April, an all-time high. This is raising eyebrows since China’s economy has been slowing for months, with slump conditions in the steel industry and a sharp downturn in new construction.
The agency estimates that 1.4m b/d was funnelled into China’s fast-expanding network of storage facilities, deeming it “an unprecedented build”. Shipments were heavily concentrated at Chinese ports nearest the new reserve basins at Tianjin and Huangdao. “We think this is a big deal,” said one official.
China accounts for 40pc of all growth in world oil demand, so any serious boost to its strategic reserves tightens the global supply almost instantly and pushes up the spot price.
Michael Lewis, head of commodities at Deutsche Bank, said Chinese officials at Beijing’s Strategic Reserve Bureau are playing the oil market tactically, or “buying the dips” in trader parlance. They add to stocks whenever Brent crude prices fall to key support lines, as occurred earlier this Spring. This is currently around $105.
“It’s is very similar to what they have been doing with copper. Whenever it drops below $7,000 (a tonne), they see it as a buying opportunity. They do the same with agricultural commodities,” he said.
China is putting a floor of sorts underneath the global oil market, calling into question predictions by the big oil trading banks that prices will deflate this year as more crude comes on stream from Libya, Iraq, and Iran, and as the US keeps adding supply shale.
The strategic buying could go on for a long time since China is rapidly expanding its reserve capacity from 160m barrels to 500m by 2020, with sites scattered across the country.
John Mitchell from Chatham House says China has stocks to cover 46 days of imports compared to 209 for the US, based on estimates from last year. India is acutely vulnerable to any disruption with just 12 days cover. The minimum safe threshold for OECD states is deemed to be 90 days.
Chinese officials are increasingly nervous as the the country’s import dependency keeps climbing, reaching 60pc level this year. This is deemed to be the danger line. Planners have been studying closely what would happen in a global conflict such as full-blown Mid-East war or closure of the Straints of Hormuz. East Asia is now far more vulnerable to Mid-East oil disruptions than the US.
China’s stock-build comes as the West steps up threats of “Stage 3” sanctions against Russia, to be triggered if the Kremlin continues to disrupt the Ukrainian elections through paramilitary proxies in the Donbass region.
Sources in Washington say the US may include Russian oil companies such as Rosneft among the mix of targets. This is thought less disruptive for European allies than quarantine measures against the gas monopoly Gazprom since gas is mostly supplied by pipeline contracts and is much harder to replace. The US has already sanctioned Rosneft’s chairman Igor Sechin, the chief architect of the Kremlin’s energy policy over the last decade.
Mr Lewis said any move against the energy industry would risk a disruption of physical trading in oil since most banks would be unwilling to handle the transactions. “It would effectively tighten supply and be bullish for crude prices,” he said.
A parallel drama is unfolding in South East Asia where China is building what appears to be an air base on the Johnson Reef just off the Philippine coast. China is also at daggers drawn with Vietnam after towing an oil rig into waters off the Vietnamese coast in the South China Sea. This has erupted in a wave of anti-Chinese violence over recent days, killing an estimated 20 people in Vietnamese cities and prompting China to evacuate 3,000 of its citizens.
There is the risk of a dangerous tit-for-tat spiral.The Chinese media has been calling for action to “teach Vietnam a lesson”, echoing the language of Chinese leader Deng Xiaoping before he launched an attack on Vietnam in the disastrous war of 1979.
Oil experts says there is no sign yet that China is hoarding diesel or boosting output of refined products such as jet fuel, the sorts of indicators that might point to preparations for possible conflict.
China’s oil imports in April mostly came from Russia, Angola, and Iraq. The IEA said there were also 615,000 b/d of shipments from Iran, a huge increase that underscores just how far global sanctions have eroded since Iran’s new leader Hassan Rouhani reached a preliminary deal with the major powers over the country’s nuclear programme.
17 Comments on "China steps up speed of oil stockpiling as tensions mount in Asia"
GregT on Wed, 21st May 2014 8:06 am
Hmmm,
Sounds like China is ‘saving for a rainy day’. Other countries would be prudent to do the same.
GregT on Wed, 21st May 2014 8:06 am
Hmmm,
Sounds like China is ‘saving for a rainy day’. Other countries would be prudent to do the same.
Dave Thompson on Wed, 21st May 2014 10:26 am
How much capacity is available to stock pile crude or finished products? A day or two at most? Here in the US what is there?
Adamc18 on Wed, 21st May 2014 10:50 am
Isn’t it a bit hilarious that this article claims that ‘The West’ is preparing oil sanctions against Russia? Virtually every country in ‘the West’ is a major oil importer while Russia is a major oil exporter. Isn’t this a bit like demanding; ‘Do as I say or I’m going to shoot myself in the foot’?
robertinget on Wed, 21st May 2014 11:06 am
It’s obvious, China has no intention of ‘sharing’ off-shore resources in the China Sea. Internal need* trumps Asian peace. China is beginning to act like its new aggressive Russian partners.
Insidently, that ANNUAL… Four Hundred Billion $ gas trade deal was indeed signed yesterday. Russia can now tell the US to forget about ‘sanctions’
Russia has clearly gone Asian.
Chinese and Russian Banks can and will
do business, sanctions or no.
*IMO China’s increased imports are a constant,not a minor trend. In time China, India, Japan, Vietnam, S.Korea will be scraping over whatever crude available.
Many questions present themselves. Not the least of which will be what happens to North Korea if China cuts its oil stipend?
Can Saudi Arabia continue to supplement Egypt’s oil needs? Here, we have two Post Peak Oil poster children nations. One a long time nuclear dictatorship with nothing to lose.Another, Egypt entering military rule on false promise of regained prosperity. The big plan for Egypt is to bring back tourism. North Korea needs to trade nuclear weapons for oil. What could go wrong?
rockman on Wed, 21st May 2014 12:06 pm
Dave – the US SPR now holds about 730 million bbls. Reduce supplies by X million bbls/day and you can do the math. BTW despite what almost everyone believes the majority of oil in the SPR is reserved for the Debt of Defense by CONGRESSIONAL LAW. And there are other restrictions governed by CONGRESSIONAL LAW. Of course, laws can be changed but that would require consensus of the entire Congress. Notice below that the release of the heating oil reserves after Sandy did not go to the public. The first priority of the gov’t in such emergencies is to satisfy it’s requirements. Which was the primary reason the SPR was created in the first place.
And were you aware of the US Naval Petroleum Reserves? Most citizens don’t…the gov’t doesn’t like to advertise them very much
The Naval Petroleum and Oil Shale Reserve (NPOSR) has a storied history beginning with its inception in 1912 during the Taft Administration, to the 1998 sale of its supergiant Elk Hills oil field (Naval Petroleum Reserve No. 1) to Occidental Petroleum under the Clinton Administration.
Today, three of the four original Petroleum Reserves (NPR-1, NPR-2, and NPR-4) have been sold or transferred to the Department of the Interior, as have the three Oil Shale Reserves. The only remaining oil reserve managed by the Department of Energy is the Teapot Dome field (NPR-3) in Casper, Wyoming, which is now a stripper field. However, DOE operation of the Reserve will also soon come to an end. On June 27, 2013, the Secretary of Energy reported to Congress the Department’s intent to sell all right, title and interest in NPR-3 through a public competitive bid process. NPR-3 is scheduled to be sold and transferred to new private ownership by the end of calendar year 2014.
BTW: The Northeast Home Heating Oil Reserve holds 1 million barrels of ultra-low sulfur fuel. The Heating Oil Reserve, created in 2000 was used for the first time following Hurricane Sandy. The Obama administration released emergency supplies to the Department of Defense for distribution to federal, state, and local first responders. None to private citizens.
!
One potential drawback of government-owned gasoline reserves is the question of whether a government cache of fuel will discourage private enterprises from building their own inventories.
And: The federal government will open the nation’s first two gasoline reserves, in New York and New England, most likely near Boston, to guard against fuel shortages if supplies are disrupted by events such as Hurricane Sandy, which battered the East Coast in October 2012.
The reserves — which will be placed near New York Harbor and in the Boston region — will each hold 500,000 barrels of gasoline. Together, that’s roughly a third of the gasoline consumed on the East Coast each day.
The bottom line: previous supply problems were a result of a lack of regional supplies but the failure of the distribution system. Delivering a tanker of gasoline to a station in NY isn’t going to be of much help if they don’t have electricity to pump it. Likewise there are enough fuel or propane trucks to make deliveries in the case of those shortage. Essentially increasing capacity of one portion of the system doesn’t improve the situation very much if the other choke points remain.
But it does make good stump speeches for the politicians. LOL.
GregT on Wed, 21st May 2014 1:44 pm
“It’s obvious, China has no intention of ‘sharing’ off-shore resources in the China Sea. Internal need* trumps Asian peace. China is beginning to act like its new aggressive Russian partners.”
Hmmm Bob,
Can you not see the hypocrisy in this statement?
GregT on Wed, 21st May 2014 2:08 pm
I think it’s pretty safe to say that strategic reserves aren’t being stockpiled for use by the general populous.
The rainy day that I spoke of above, was referring to civil unrest, and foreign military threats when the oil will be needed the most. AFTER the majority no longer have access to oil and gas.
dolanbaker on Wed, 21st May 2014 2:19 pm
China could stockpile as much oil as there is capacity in every fuel tank in the country, as it is at any time most fuel tanks are only half full. Just imagine the shock filling up all those tanks at once would cause. It would make the US 1973 “oil crisis” seem like a picnic.
If this is their intention, we’ll soon see quite a jump in international oil prices.
Perk Earl on Wed, 21st May 2014 2:26 pm
500m barrels by 2020 divided by 6.81 barrels a day imported currently (and maybe more later) = 73.4 days of oil supply.
1.4m barrels a day est. going into SPR. 6.81-1.4=5.41 500 divided by 5.41=92.4 days worth of oil.
Northwest Resident on Wed, 21st May 2014 2:49 pm
It seems to me that any stockpiling done by any nation these days is most likely not being done with the intention of keeping the hundreds of millions of cars driving to the local McD’s, but for their respective military and security forces.
rockman on Wed, 21st May 2014 3:36 pm
Dolan – “Just imagine the shock filling up all those tanks at once would cause. It would make the US 1973 “oil crisis” seem like a picnic.” You don’t have to imagine it…just pull up photos of the long lines at US fuel stations during our “oil crisis”. Long after all the conspiracy theories about oil companies hiding lot motor fuel the gov’t investigators figured out where all that suddenly missing fuel went: into the fuel tanks of all those millions of vehicles. In the oil patch we call it rolling storage.
For those of us that live in hurricane alley it’s easy to understand. Last time a hurricane blew thru Houston all the stations were sucked dry. And for days afterwards long lines at the few stations that got deliveries. I never spent a minute waiting to fill up. Been living in the Gulf Coast for more than 6 decades…not my first rodeo. LOL.
rockman on Wed, 21st May 2014 3:43 pm
NR – From my post above: The Northeast Home Heating Oil Reserve holds 1 million barrels of fuel. The Obama administration released emergency supplies to the Department of Defense for distribution to federal, state, and local first responders. None to private citizens.
And as I also pointed out by law (which you’ll never see anyone in the gov’t point out to the public) is dedicated to the DOD. It’s their emergency reserves for the most part…not the publics.
Northwest Resident on Wed, 21st May 2014 4:11 pm
rockman — Yep! Got that! I’ve been a student of your’s for a while now, that’s how I know a little bit about what is actually going on. I merely thought my point was worth making because a couple of the posts above mine were speculating on how many cars that stockpiled/reserve oil would go toward filling. Answer: Not many. That stockpiled/reserve fuel is for strictly military, security and government purposes. It will be powering the homeland security crowd control vehicles when we’re all back to riding bicycles and using our own two feet. In China, it will probably be powering tanks and armored cars, Tiananmen Square style.
Makati1 on Wed, 21st May 2014 6:43 pm
China is only doing what every other country should be doing: preparing for the coming crash. They seem to understand that the new pipeline to Russia may not happen soon enough and that US meddling will eventually start world war 3. S.E. Asia will eventually be part of or at least colonies of China. Guess I better learn Mandarin…lol. Better than FEMA camps, I think.
rockman on Wed, 21st May 2014 7:02 pm
NR – Figured you did. I just use some posts to slide in my often redundant thoughts.
Kenz300 on Thu, 22nd May 2014 5:50 am
China is getting buried in trash or waste……
It is time to use that waste or trash to produce energy, biofuels and recycled raw materials for new products.
Second generation biofuels can now be made for algae, cellulose and waste…..
Local energy production and local jobs is a much better proposition than importing more oil at ever higher prices……